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Is your eCommerce business structured in a VAT compliant and efficient manner ? (6)

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For foreign companies engaged in eCommerce business in EU, it is important that they are structured in an appropriate manner to operate in a VAT efficient/compliant manner.

Whether you are a foreign company looking to buy from an EU supplier and sell onward to an EU customer or you are importing goods into EU to sell onward to an EU customer, structuring your business right in the first place to remain tax efficient and compliant is imperative. Otherwise you may end up paying a lot non recoverable VAT/import duty on business transactions and may pay penalties and interest for non-compliance.

Non-EU established businesses sometimes buy and sell goods in the EU without appreciating the VAT consequences. This can result in the business being exposed to unnecessary VAT and administration costs and to VAT registration in multiple jurisdictions as well as penalties and interest on unpaid VAT.

The scenario

The classic scenario is that a Non-EU business buys goods from a supplier in Ireland, for instance. The supplier invoices the Non-EU business plus Irish VAT; the goods are forwarded to customers of the Non-EU business in another EU member state for e.g. Italy and Spain; the Non-EU business invoices its customers without VAT; the Non-EU business is not registered for VAT in the EU; and the Irish VAT is regarded as a cost of doing business in the EU. However, in the EU the VAT treatment is determined by the physical location of the goods so, in buying goods in Ireland and then selling them on, the Non-EU business is potentially required to register for VAT in Ireland. By not being registered in Ireland and selling goods to other EU member states, the business is also exposed to VAT registration requirements in each member state to which the goods are shipped. If the business has been conducting its business in this type of fashion for some time, there can be significant penalty and interest implications for failing to register.

The solution

If structured correctly the Non-EU business can register for VAT in one EU member state only and, assuming its EU customers are all businesses in their own right, recover the Irish VAT charged. Correct structuring will reduce costs, increase profit, improve competitiveness, as well as remove the exposure to penalties and interest.

Sales to non-business customers, such as the general public, will have additional VAT registration implications as different rules applying to the sale of goods to non-VAT registered customers.

Another Scenario

Another interesting scenario could be where a non EU business imports goods to EU and sells it onward to an EU customer. The business would have to pay the import country VAT/duties. In absence of the VAT registration or any place of establishment in the EU the import duty and VAT would not be recoverable and would end up being a cost of doing business for foreign entities.

Solution

Depending on the volume of transactions a potential solution for the foreign entity could be to incorporate a subsidiary in an EU country and sell goods to the subsidiary first, in order that the subsidiary can claim back the VAT while importing the goods. The subsidiary should then sell that on to the customer in the EU country. If the customer is a business customer than no VAT is to be charged to the customer however if the customer is an individual then it will have additional VAT registration implications as different rules apply to the sale of goods to non-VAT registered customers.


Hence its really worthwhile that you spend some bucks initially to structure the business in an appropriate manner. In return you can save substantial costs in terms of VAT and any potential interest/penalties for non-compliance as well as boost your business overall profitability.

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Another very useful post - thanks Digitas!

I have a question: Say I'm importing Chinese goods into an EU country, for selling to individual EU customers. Would you suggest that I incorporate in HK to take advantage of the tax savings, or incorporate in the respective EU country to claim back the VAT? If the question is too general please let me know - I may be able to provide more details.



Amy

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Hey Vortex, it would be hard to give a specific answer here without knowing other business dynamics/variables but you should definitely do it via an HK entity to remain tax efficient. You can consider two options form there on wards to deal with EU VAT tax efficiency:

Either you can get your HK entity registered for VAT directly in one of the EU countries or incorporate a subsidiary under your HK entity in EU in which case you sell your goods to the EU subsidiary in the first instance and the EU subsidiary then deals with selling it on to EU customers. However you may drive most of the profits of EU subsidiary back to HK entity by way of transfer pricing to enjoy tax free business profits.

There could be other options as well and if you get in touch with a tax adviser they will guide you through in detail.

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Really nice and very useful post, Digitas!



LeadCloak

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And another important point - have an accounting system that can deal with these issues.

I mentioned this in another post, but it can be a huge pain to get your books in order with VAT issues.

Many bookkeeping programs have trouble dealing with this and at the end of the day, everything needs to be accounted for, so VAT paid and received has to show up somewhere..

Make sure to do some research and talk to a specialised accountant who knows what works and what doesnt

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Yeah thats absolutely essential. Not only a good accounting system will assist in VAT, it will also give a greater insight into accurate business reporting to track your business performance and further helps in a smoother (low cost) audit.

Sent from my SM-G955F using STM Forums mobile app

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